Earnings Call: H2 2023

Jun 15, 2023

Good morning, and thank you to those of you who are joining us today. Good morning. Thank you to those of you who are joining us today to hear from Tatton Asset Management, who announced their interim results earlier this week on Tuesday. We are going to have a presentation from the management team. There will be an opportunity for Q&A at the end, so please feel free to submit questions as we go through. I am also going to launch a poll, so if you could please respond to that as well. Otherwise, without further ado, I will hand over to Paul. Thank you, Hannah. I hope you can all hear me loud and clear, and see me, too. Yes, quick introduction to the speakers today. There is myself, Chief Exec. I am joined by Paul Edwards, our Chief Financial Officer, and Lothar, our Chief Investment Officer. On slide 6, we have just got a quick divisional structure slide, which shows you the Tatton Asset Management PLC with the two separate divisions. So we have got the Investment Management division, which is very much the growth area. The Model Portfolio Service, which is now responsible for 81% of the revenue of the group. Then to the right-hand side, you have got Paradigm, the IFA Support Services division, which is the consulting side of the IFA club, and Paradigm Mortgage Services, our mortgage club, which is responsible for 19% of the revenue. We will cover all three in the presentation, but if I can jump forward to slide 8, key highlights. Just pulling a few of those highlights together, not all of them. Obviously, we have had a tremendous 12 months. Very pleasing to see that our key metric of AUM and influence is now up to GBP 13.9 billion, which is an increase of 22.3%. So obviously, we are delighted with that. That is reflected by the organic flows. So our flows were a record high, and our flows got up to GBP 1.8 billion for the last 12 months. So we had done GBP 900 million in the first six months. We thought the second six months might be a little bit not as comfortable as it turned out to be. But we actually did the same again in the second half, so GBP 1.8 billion, which we are delighted with. That reflects down into our new profit line of GBP 16.4, up 12.9%, and an improvement in our operating margin to 50.7%. Also pleased to say that we are announcing our final dividend of 10p, which again is progressive and sticking with our mantra of distributing 70% of our net assets. The other key point to take out of that really is the number of accounts that we have. And we are now over 107,000 accounts. So a quick little bit of simple arithmetic dividing that into the GBP 13.9 says that actually each one of our account holders has on average GBP 130,000 with us. And I think that is testament really to discretionary fund management to the mass market. Discretionary fund management has never been available to people who could only invest. Or sorry, normally only available to people who can invest over half a million or GBP 1 million. We've brought that down to GBP 130,000. We actually don't control that. That's controlled by the IFAs. IFAs basically decide on what elements of, or what amount of assets we manage on behalf of their clients. We have no strict minimum. We let the IFA decide. As I say, that comes down to GBP 130,000 per account. Just taking the maths on a little bit further, at 15 basis points, that works out at a cost of GBP 195 per annum to the end client. To get discretionary fund management to the degree that we operate for GBP 195, we think is very reasonable indeed, and actually ticks a lot of boxes for Consumer Duty that the regulator is launching next month. We're beautifully positioned. The MPS world where we play is maturing. It has matured to a great extent over the last couple of years. There are lots and lots of people involved offering MPS services, which we think is refreshing. When we first started, it was a bit of a crusade and an educational process to get IFAs to look to outsource their fund management decisions. Now it's becoming a lot easier, and as I say, with lots and lots of new entrants in the market, it becomes a quicker proposition to convert IFAs into utilizing our services. Thus the GBP 1.8 billion over the last 12 months. Happy to say that post the end of the year as well, if we look at the results for April, May, and so far for June, we're trending at GBP 150 million of new flows per month. Again, moving nicely onwards. Our strategic partnerships with distribution, IFA distribution, with Tenet Group, with Fintel, and with Paradigm continue to do well, and we're getting really good flows from these groups. I think that really concludes slide 8. Looking onto slide 9, showing really good CAGR growth of 24% of AUM and 18% for group revenue. That step change that I talked about on organic flows moving from the GBP 1 billion to GBP 1.2 billion that we've tended to do up towards the GBP 1.8 billion that we had in March 2023. Paul will take you through the margin improvement and his outlook for the future. As you can see, bottom right, that's been clicking up point by point. From 38% back in March 2017 to 51% in March 2023. Without further ado, I'll hand over to Paul. Thank you. Yes, it's been a difficult year for many businesses this year. I think Tatton's performed very well. It's been consistent, H1 to H2. For the year, we've increased revenue by 10% to GBP 32.3 million. Adjusted operating profits increased to GBP 16.4 million, just under 13% increase. That's on the back of a reasonably significantly inflationary environment this year. Our overall actual cost increase, actually increased about 7% or 8% in the year, or GBP 1.1 million. That's helped drive our profit margin to 50.7%. All the adjusting items year-on-year are broadly consistent with this year. There's a slight change in the gain on fair value deferred consideration, which is a credit of GBP 2.6 million. That growth comes down to, obviously fully diluted earnings per share of just over 10% to GBP 20.6. Paul just mentioned the final dividend, which is up 17% to 10p, which gives a full year dividend of 14.5%, which is a 16% increase year-on-year. On the next page, we go into the divisional performance of Tatton, and you will see that what drives Tatton is the AUM/AUI growth, which is 22% this year or GBP 2.6 billion. Clearly, that comes from the flows, which is a record GBP 1.8 billion this year. We had the acquisition of 8AM, which adds a further 1.1. We have had an impact in markets this year actually, which was if you were on this presentation back at H2 2023, back in November, you will remember that would have been GBP 900 million from an AUM, AUI standpoint. So a negative AUM movement of GBP 900 million. It sort of netted out for the year at GBP 400 million. That is what has driven the revenue by GBP 2.6 billion, up 11% to GBP 25.9 for Tatton. Also, you will see the adjusted operating profit has increased up to GBP 1.9 million to over GBP 15 million. I think the key here, though, is the continual increase in margin, which we anticipate to continue. That additional revenue that we got through and the additional profitability or the marginal impact of that has actually been about 73%. When you take account of those markets, which is actually an impact of about GBP 1.2 million. So that GBP 400 million on average over the year has the impact of profits by GBP 1.2 million. If you add that back, it would have been 80% that dropped through to the bottom line. Paradigm also had a very good year. Certainly from a mortgage completion standpoint, we had a record level of mortgage completions up to 14.5 of a 10% increase, and that effectively enabled us to increase our revenue overall by 7%. Margins and operating profit, or certainly operating profit was broadly flat year-on-year and margins slightly decreased. That is because we basically returned to a normalized cost base post-COVID. On the next page, on page 14, is really the group's financial strength. So it is a combination of the balance sheet and our capital adequacy. The only really change on the balance sheet this year is that you can see the net assets have significantly increased just to under GBP 42 million. You see the investment in the joint venture of GBP 6.7 million, which is our 50% holding in 8AM, and obviously the continued cash generation, GBP 26.5 million of cash we have now on the balance sheet. Of that GBP 26.5, what is really free cash flow? It is the GBP 10.4 that you see on the waterfall graph on the right-hand side. The capital resource requirement for the group is GBP 4.4 million, and we are holding 337% of that resource requirement with a GBP 10.4 million headroom. On the cash flow bridge, the key number here, which I always refer to, really is the operating cash. So it is really the cash conversion, which is effectively 99% of operating profit. So it is very strong. The calls on that cash are just the normal dividends. If you followed Tatton over the last few years, you will recognize that we continue to pay dividends around 70% of adjusted operating profit on a sort of one third, two third split from interim to final. And then you just got the normal tax payments and acquisition related costs. In addition, a relatively modest amount of CapEx, which then leads us to the GBP 26.5 million. Finally, just from an outlook perspective, net flows for the first seven weeks of this year have been very strong. So they've been GBP 350 million, and if you do the math on that extrapolates to GBP 150 million a month or GBP 1.8 billion, so another GBP 1.8 billion, albeit it's still relatively early days. Obviously, markets remain uncertain. It's relatively volatile at the moment, but we remain cautiously optimistic on that. And we're at a record GBP 14.3 billion of AUM, which is touching distance from our GBP 15 billion target. From a Paradigm perspective, you're probably all reading the press about the impacts recently of the lenders withdrawing products from the market and pushing them back on the market and repricing them. That's clearly going to have a short term impact in the market generally. You've seen obviously the impact of increasing interest rates and affordability issues. But overall, it's going to be a tricky year for Paradigm in many respects. But overall, it's still a relatively small part of the group. From just the inflationary environment, the costs, clearly CPI is still at 8.7%. We will be increasing salaries on an average basis of between 5% to 7% this year. And we are investing in an additional five people, which are all really IFA facing people or distribution service. If we can turn to the strategic side then. If we can, on slide 18. We gave the market a guide back in FY 2021 that we would grow from GBP 9 billion to GBP 15 billion over the three-year period, and we would do that by organic flows of GBP 1 billion and some M&A activity for the other GBP 1 billion per annum. That's the original position. If we look at the actual performance, well, the breakdown has not been quite as planned. The organic growth's been stronger than expected and the M&A activity has been less. Then we've had the increase on the markets and then the drop in the markets in FY 2022. So they've balanced each other out. As Paul says, as we sit here today in June, we're now GBP 14.3 billion towards the GBP 15 billion target, which was the end of FY 2024, so basically to the end of March next year. So we're only GBP 700 million short, and we will do that by organic growth. So I'm confident that we will exceed that GBP 15 billion target that we gave ourselves back in FY 2021. And we will probably look to guide a new target level, next time we report in the interim. So GBP 700 million required. On the M&A side, we are very much an organic house. We have done a little bit of M&A. We can talk on them individually later on. But they've been smaller amounts that have helped, but as I say, not to the degree that we thought back in FY 2021. It's quite hard to acquire businesses these days for the right price in our world, mainly because the Model Portfolio Service has grown in popularity. Everybody who runs these believes that the valuations are a lot higher for them, and some are basically saying, "We're going to build our FUM up before we look to sell." We haven't got any M&A activity to talk about today, and there's nothing effectively that we are looking at that is imminent. Although we'll keep fishing and keep looking to see what's out there. Turning to slide 19. As I say, the MPS world growing of age, and it's nice to see that the actual pool that we fish in has actually increased. Now it's up to GBP 103 billion of FUM. We've got a 13.4% share of that. But it's nice to see that increase from GBP 80, GBP 81 up to GBP 103. We believe that that market will continue to grow. All of the consultants are basically saying that it'll grow to GBP 200 billion by 2027, so that's obviously a huge increase. If we could maintain our share minimum and maybe even improve on our market share to take our share of that extra GBP 100, then that really is the execution of the plan that we've got on the way. We have got Consumer Duty coming, and Consumer Duty, we believe, could be a really attractive tailwind for the Tatton Investment Management business. We've always concentrated on client outcomes right from the outset, and we've always dealt with a good price, and obviously have given value for money with the 10-year consistent investment track record that we now have behind us. Lothar will cover that off later on in his presentation. But we now have a 10-year track record, which is the envy. It is nice and consistent, and we are very, very pleased with that positioning and as I say, Consumer Duty coming forward. We'll look to grow the number of firms that we have, and there's a significant opportunity not only to grow those firms, but also to actually extract more of their assets into the Tatton Investment Management proposition. We've got a slide which will show the penetration that we have with our Paradigm firms that we've worked with the longest, and also the penetration that we have with the new firms that have joined us post the IPO. It's really pleasing to see that there's a gap there, and that gap means that, over time, we should be able to increase the amounts that we've had from the non-Paradigm firms, the direct firms. That actually does show a target of round about GBP 14 billion that could come our way if we were to get as close to those new firms as we have been to the Paradigm firms. More of that later. We really do enjoy fantastic strategic partnerships with other distribution businesses within the IFA community and 50% of IFAs tend to be in clubs or associations. We're working very closely, obviously with the Paradigm firms, with the Tenet firms, and with the Fintel firms, and looking to develop our relationship with Sesame Bankhall Group and Threesixty. Then we've touched on the M&A at the bottom, which as I say, is quite light at the moment because of the emergence of the MPS world and everybody's new valuation ideas. If we move to slide 20, this really shows the increase in value. If you look at the bottom in the green shaded area, you can see in 2017 there was GBP 25 billion in DFM MPS, obviously where we are, and now that is GBP 103.5. So it is 16% of the total, so there is still a long way to go. We believe that IFAs are in rude health and will continue to prosper. We believe that they will continue to place assets with platforms, so platform growth will continue. We believe that DFM MPS will take a greater and greater share of those assets sitting on platform over time, and we totally concur with the GBP 200 billion that is forecasted by the market. If we look at where we are with the pie charts on slide 21, we can see how the jaws have changed in favor of the direct firms over that period of time. We have dropped off a couple of years. We are looking from March 2021 to March 2023, and you can see now that 81% of our firms are non-Paradigm firms and 19% are. Also, you can see how the AUM has changed over time. It always was dominated by the Paradigm firms back in 2021. You can see how the direct firms over time are increasingly important to the overall AUM that we have. On slide 22, we have our saturation or penetration slide, which we are happy to share with you. That basically says that each firm on average, so we assume that the firms or cohorts, have around about GBP 40 million on platform, available on platform. If we look at the Paradigm firms, the average of those firms with the assets that we have comes out at GBP 30.8 million per firm. If we look at the new firms or the newer firms that have joined us post flotation, there is actually a huge number of those. There are 703 firms, but we have only got GBP 10.8 million per firm on average at this moment in time. Again, a little bit of simple arithmetic and non-scientific approach. If we were basically to get as close to these firms as we have done with the Paradigm firms and they are cohorts, then there is a potential opportunity of GBP 20 million per firm, which is GBP 14 billion in total. That obviously assumes that we just continue to farm to the existing supporting firms that we have, and obviously that will not be the case. We want to drive the number of member firms supporting us up as high as we possibly can. That is very much our drive. On slide 23, just showing how we have evolved the operation. Lots of IFAs are very happy to outsource completely to us the investment proposition after they have chosen the right portfolio for their client and the right attitude to risk. Others want to have a little bit more of an involvement, some like a co-brand, and we have 14 of these arrangements. This is literally where we co-brand with the IFA firm and have Tatton very much at the forefront as well. We can then go a stage further to white label if the IFA wants to have its own named portfolios, and there are a few examples there. Or we can go to the final stage where the IFA or a couple of members of the IFA team would like to join our investment committee and have a joint investment committee working towards actually providing a bespoke asset allocation and fund selection. We have the final say in that arrangement. Nothing can be effectively positioned within the portfolios without our final say. It really is just a collaboration of working with the IFA firm where they want to actually be involved in the investment committee. In all of these propositions, we still remain at 15 basis points and we have no pay away, so there is no drop in margin. We can provide this service as I say, the MPS world evolves. On slide 24, we just look at attrition. There is consolidating, a consolidation of certain IFAs. Consolidation has a yin and a yang for us. We really quite like consolidation because it says to all IFAs, you are actually building up something of value, and that is obviously a good thing. For every IFA that wants to sell, there is an IFA who wants to buy. Basically, lots of IFAs are bringing their sons and daughters into the business to continue with the development of the business as they see that they are building businesses of value. But we do have attrition, and the attrition is 1.8%. That is slightly better than last year's attrition, which was 2%. We have even highlighted where it is attriting to with that consolidation. So consolidation, we keep an eye on, and we always will. It is something, as I say, that we would always make sure we have a weathered and continued eye upon. Turning to Paradigm Consulting on slide 25 and also Paradigm Mortgage Services. As Paul alluded to, obviously the mortgage market is likely to be difficult. We cannot obviously ignore that, but it is a very small part of what we do. 19% of our revenue comes from Paradigm Consulting and Paradigm Mortgage Services. You can see that consulting increases and grows by around about 2.5% to 3%, so it is just nice steady increases. We have done incredibly well in building up our number of mortgage advisers who utilize our mortgage business and also on the protection side, and we will continue to do that. Mortgage advisers will focus their attention onto other areas, product transfers, dealing with protection assurance, and rebroking of that to fill in that revenue gap. But we do expect applications to drop, and we are giving sort of like a guidance of possibly 10%-20%. As Paul said, that would not push us away from our consensus numbers, but obviously will have an effect, which we cannot ignore. I think that really is it apart from slide 26, which is just our investment case. I think our brand has strengthened remarkably well over the last 12 months since we recorded. We are operating in the fastest growing segment of the U.K. wealth market, and we look continually at what we should be doing next, and we cannot find anything better than the MPS world, and we obviously want to continue to at least keep our market share or if we can, increase and improve upon that. As I mentioned earlier, we have got this lovely consistent 10-year investment track record now, which is very good to have. IFAs want to see you being consistent. They don't want firms that actually shoot the lights out one year and then down the next. So we've got that lovely consistency, and 10 year is obviously a great number. We've got that lovely distribution link through all of our IFA propositions and partnerships. And, yeah, a highly scalable model, which we're very, very proud of. We probably won't dwell on the final bullet point of experienced and entrepreneurial management team. I'll let you decide upon that. I'll pass without further ado, hand you over to Lothar on the investment side. Thank you very much. Yeah, one thing that we haven't quite mentioned yet is Consumer Duty, which is new regulation that is coming into effect from July, and price and value is the leading principle there. Price was never the issue for us. Value, well, we now have a 10-year track record in managing Model Portfolio Services under discretionary wrapper on platforms, and that's this slide where you can see that, compared to our peers, we have put in a very consistent performance track record. On a risk-adjusted basis, also somewhat outperformed them. The next slide gives the same picture for the five-year period. Similar picture again. For the one year, it looks a bit wonky, but that's obviously because the asset allocations of the risk profiles, which we managed, did not permit for positive returns last year. We did slightly better than our competitors, as you can see on this slide. But nevertheless, obviously, as the Chief Investment Officer, I'm never happy when I can't produce positive returns for our underlying clients, which obviously, as we all know, last year was the confluence of the bond market resetting to the old normal interest rates and yields again, and equities obviously suffering a re-rating from that end. So that's also started to shift our AUM. Oh, yeah, sorry. Shouldn't forget the ethical portfolio, which now also altogether has a five-year track record. The balanced, even an eight-year track record. But we can show now the five-year track record there. If that looks more outperformance and slightly higher risk than the others, that is because the ethical ESG universe is a restricted and quite growthy investment universe with a lot of exposure to the U.S., and we all know how that has panned out over the last five years. On the next slide then, the matrix of our model portfolio offering. Down the side, the different slides, and across the top, the different risk profiles. As you can see, at the bottom, we have seen a bigger growth in the higher risk profiles as investors reassess their need for being invested in bonds, even though I've now stopped saying to advisers, "Bonds are running out of road. Please make sure that you're not allocating clients into that wouldn't need to. It did result in, as you can see, only 2% of our book being in the defensive, in the 75% bond portfolio, which I was actually quite pleased about, but we can see that the higher risks are from active onwards have grown relatively faster than the rest. On the right-hand side, you can see that there's still a trend towards the hybrid model, which combines the tracker with the active and the ethical growth has slightly tailed off compared to last year's, while the global asset allocation that provides the same Model Portfolio Services but with a global cap-weighted regional allocation is currently growing the fastest. I've got a couple slides in terms of our investment outlook. Just perhaps for your interest, we have come through a tough winter, which hasn't turned out quite as bad as everybody thought. Recession has not yet materialized. Seems to be the best signpost of recession ever. But there are certain clouds on the horizon, so we still can't be quite sure whether we can actually really sail through this globally without a meaningful earnings contraction out there, which obviously would put equities under pressure. Central banks are still raising interest rates, particularly in the U.K. In the U.S., we had a pause last night, but whether that's really peak interest rates yet is not quite certain. Therefore, we continue to be on the neutral side. I think, perhaps we should leave it at that. Yeah, that's fine. Just perhaps go for questions now. Yeah. Our summary slide is slide 36. Your strategic direction is very much the organic growth piece that we talked about. We're very close to that, concluding that roadmap to growth to get to the GBP 15 billion. M&A activity, as we said earlier, is pretty quiet at the moment. I think over to you, Hannah. Thank you very much. We've got some questions in. "Congratulations on the great set of results. Can you please comment on the capital allocation policy going forward? How will the free cash be split between increasing dividend, acquisitions, potential share buybacks?" In terms of acquisitions, I think you alluded to this in the presentation, what are the parameters that you're looking at to decide whether a good fit for Tatton, and how is the valuation stacking up in today's market? Okay. I'll deal with what we're looking for. From an acquisition point of view, we're very much looking for anybody who we think is offering complementary Model Portfolio Services in the marketplace. Maybe where they could take us into a whole new group of IFAs that we're not currently talking to. So distribution links with AUM and with complementary MPS propositions, probably needing to be roughly the same sort of price. As I say, valuations for those businesses have shot up as MPS has become very important within the marketplace. We've been out-priced a couple of times. So, our recent acquisitions have been around about sort of 10 times for the 8AM proposition. We're not going to be able to buy businesses at 10 times currently at the moment. So, yeah, we'll just have to see how that pans out, but that's it. I think when it looks at capital, I'll let Paul talk about the capital allocation. Yeah, sure. Over the piece, we've actually returned well over GBP 30 million to shareholders through dividend, and that's through a policy of, I think I mentioned earlier, 70% of adjusted earnings. We see no reason why that should change going forward. That's obviously the key component in terms of how we allocate our capital. Clearly, we have GBP 10.4 million headroom over our capital adequacy. GBP 3 million of that probably will be taken up by the interim dividend this year. If we leave a little bit of headroom there, a couple of million headroom, we'll have GBP 5 million free float for any small, maybe bolt-on acquisitions if and when they do arrive. Thank you. Paul Hogarth, you just touched on there about the strength of that 8AM deal. Yeah. Can you please confirm details around your role at 8AM and strategically what the acquisition brings to Tatton? Yeah. Very similar to what we said earlier, really, which is it was a complementary Model Portfolio Service range, a range that we're not involved in. We haven't integrated that business yet because we've only bought 50%. The business is standalone. It runs on its own. Although we have assisted in certain ways. We like the management team. They're a good management team. We've assisted them with things like on technology, where we've given them use of our portal to help client engagement. We're pleased with the assets that they have absolutely maintained. I think we guided the City at GBP 800 million to start off with. That went to GBP 1 billion, and now we're at GBP 1.1 billion. So it takes us into a whole different type of IFA. As I say, it's complementary, and it's the same price as our offering. Thank you. A couple of questions here around competition. As you rightly pointed out, valuations are going up because the sector is hotting up. How is your success being responded to by both competitors and in terms of the scope of the IFA landscape that you now have to go after? Yeah. The genie's out of the bottle when it comes to MPS. Yes, we have lots more competitors out there, but we actually think that's a good thing. As I say, it speeds up the proposition when we're talking to IFAs. When we first started, it was a crusade. Then it became an educational process, and now everybody is aware of the MPS world and very much aware of where Tatton fits, because the Tatton brand is actually very strong, and it's got stronger over the last 12 months on the back of that. More competition, we've seen people come towards us on price, but they tend to be coming towards us gradually because of their own legacy book. Some have gone underneath us on price, but it's a slightly different proposition. But as Paul alluded to, and I think Lothar did as well, it's not just about price, it's about value, too. I think when you look at why we do as well as we do out there, it's because of, one, we're competitive on price, two, we have that long-term track record of consistent investment returns, and three, our service standards are excellent. Fourthly, our communications to our IFAs, so that they are ready and armed when clients actually ask them questions about what's going on in the markets, what should they be doing, I think are second to none. So we bury our IFAs with video content and weekly market updates and everything else. We're a specialist, we're an MPS specialist, whereas you've got a lot of people now who've come into it just because they think MPS is the place to be, and they may be straddling all parts of the value chain in that regard and are just adding that to it. So we are competing still against the same people that we were competing against. It's not really changed. As I say, price comes towards us, but we're very happy with the 15 basis points. We think that's absolutely spot on. We're under no pressure to reduce that. Okay. Well, who do you see as your two and three biggest competitors? Yeah What is the reason? Our competitors would be RBC Brewin, they would be Brooks Macdonald, it would be LGT Vestra, sometimes AJ Bell. They are the ones that we tend to come across, our FE Investments. We do not tend to lose that often. When we do, what is it down to? Probably local arrangements or local information. I cannot think of any specific reason that we would lose to anyone. We are completely open around what our performance looks like. Every IFA has got all the tools to check what our performance is. They can map anybody against anybody else, so there is no shades of gray or opaqueness in that world. We are very proud of where we sit with our track record on that and where we are price-wise. Okay. In your annual report, you talk about loss of a key client being a key risk. How big are your top three clients, and how solid are they in terms of ease of switching? Interesting, that one. Yeah. Sure. There's no really significant concentration or what I would call material concentration in clients. Sorry, what was the last part of the question, Hannah? The second part of the question. Do you have any particular that you I've lost it now. Here we go. You talk about loss of key client being a key risk, and how big are your top three, and how solid are they in terms of ease of switching? Anyone can switch at any point in time. They can just choose to use a different provider of MPS, our DFM service. But the reality is, whether this is either on our service or on platform, it's very sticky. As Paul alluded to before, when you look at the attrition, it's very light. And you'll see, obviously, the continued growth of AUM over the last five, six years has been phenomenal. So I think the risk is relatively low. In terms of the top three client, in terms of value, it's probably one and a half, two billion, probably max. Across the three. Across the three, yeah. Thank you. Paul Hogarth, you mentioned that Consumer Duty regulation could play into your favor. Can you expand on why this might be the case? Consumer Duty is all about client outcomes, and as I say, we've had that at the forefront of everything we do. Consumer Duty talks about price and value. I think we are giving our service, as I said, for GBP 195 on average. That is a very good price. Some would say it's cheap as chips, but we've said it's inexpensive for the purposes of the call. Also, it's also about value. It's about your returns and how you do. I think the big thing really with the regulator is them now saying to not just IFAs, but platform providers and asset managers, "Are you sure that the services that you provide are priced correctly, and do you think everybody is getting the kind of return that they should get for the price that they're paying?" I think that tends to lead IFAs in the main to start to look at their existing book and maybe just question whether everybody is in the right place and getting the right price and right value. I would imagine that when that exercise is done and you look to segregate or look at what actually happens there, that we could see some assets transitioning towards us because of our price and value. Would that be price adjustments from your competitors? I think it depends, really, on what the service is, how tailored that service is, how bespoke it is, what kind of price that is compared to what the return is. If you were to take an example, and I don't want to actually talk about any one particular firm, but if you talk about a discretionary fund management piece where, I don't know, the charge is 60 or 70 basis points and our charge is 15, and if the client got the same end result from the markets and the performance of the asset allocator and fund manager, then you ask yourself, "Why am I paying 60 basis points when I should be paying 15?" That's what Consumer Duty takes you to. Thank you. Can you expand on how your variable pay structure works so we can better understand how costs might go up and down in a good and a bad year? Do you want me to do that? Yeah. Yeah. The variable pay, well, obviously, we give annual salary increases every year. That really, generally, tracks inflation, plus or minus. The variable pay element is really around sales performance, and that is linked to flows, so new flows. Typically, on average, we are probably paying GBP 400 per million of new flows. As the new flows increase, as they have this year, they have gone from GBP 1.3 billion to GBP 1.8 billion, effectively that half a billion of flows, GBP 500 million, will generate about GBP 250,000 additional bonus payments. That is a definite variable cost to business. Then we also have a sort of general bonus pot around for the rest of the group, which then gets allocated against internal plans and performance criteria. Thank you. A recent FCA discussion paper where some commentators such as PIMFA seem unhappy about the potential effect on MPS services. Can you comment on how you see this? Yeah. Not at all concerned about that. I did read that comment from PIMFA. I think basically what they were saying is the discretionary fund managers would have to operate regulatory-wise at the same level that asset managers do. That is not a concern for us at all. We are highly regulated. We have a very strong compliance ethos. I really do not see that as an issue, to be honest. Okay. Thank you. Lothar, in your Q&A in the results release, you mentioned you wanted to see Tatton continue to help expand retail access to DFMs. What might this look like? Under your current model, would that mean that smaller IFAs would need success in targeting less wealthy clients? Do you see that happening, or is that more the domain of digital-focused retail distribution models? No, we've from the start provided a proposition where we're not setting any minimum investment levels for our discretionary service. It's really just continuing to do what we've done for the last 10 years, just on however many platforms we can operate on. The IFAs are then deciding how large or how small the clients might be to whom they offer our services. We're hugely scalable, and therefore, it doesn't really make a difference to us whether a client has GBP 50,000, GBP 500,000, or GBP 5 million. It's therefore really down to the IFA sector to further that democratization, if you like, of access to professional portfolio management. Okay, thanks. Are your average revenue margins likely to come under pressure from a continued shift to passive strategies? No, I don't think so, no. I think we're happy with the 15 basis points. I think it's the same question, whether it's passive or active. Actually, we have got an awful lot from the distribution. If you look at the AUM distribution, you can see that we're still in favor of active from where we are, with 42% active. We don't see any issues on that regard, and 15 bps works on both sides. As you become bigger, how are you guarding against key people risk, senior management leaving, and how do you think about the second rung of management who are now becoming senior in the organization? Yeah, it's a very good question. I think we look to reward our management team and the second line and every member of staff, to be honest. If you look at our churn rate, our churn rate is so low, which I'm very proud of. I think when you look at the business, with the business growing as it is, it's a good place to be. Everybody enjoys a growing and thriving business. It's nice to be where we are. So it's got a lovely culture and a lovely feel, and we've only got 105 employees, so we're still very small, and everybody knows everybody's name, and it's a good place to work. Well, following on from that, this question says you're so successful, can you not spend more to invest in sales to bring forward higher growth levels? Again, a very good question, and a question that we ask ourselves all the time. Could we spend more? But I'm not sure that that would necessarily reap the rewards. It's not as simple as to say, if you doubled your sales efforts and costs, would you double your FUM? I think what we'd rather do is just sort of increase the size and scale as we are doing. And we know how well our teams are operating and what capacity they're running at. So I think it's a good question, a question that we do ask ourselves all the time, but we think we've got a good handle on what is the right size of team and the right cost to get to where we need to get to. This is a land grab, though. This is very much get as much as you can whilst you can. It is an excellent question. Sure. Something you wrestle with regularly. Under Consumer Duty, there is a pressure on IFAs to look at percentage charging on AUM. Higher value clients may be subsidizing lower value clients. How will Tatton address this as the cost to manage a client for you with 100K is the same as a client with 1 million? Yeah, this is the question about ad valorem fees, isn't it? The industry runs on ad valorem fees, and it is just something that I cannot see that the regulator will focus on. They do want to see that everybody has price for value, but I do not think this is working towards a flat rate or anything like that. It is not going to be Tatton's decision to do that. I think that is left to a wider power. Again, it is not something we expect to happen. Well, that is it for the questions. It just leaves me to thank the three of you and those of you watching and for your insightful questions, and say that we look forward to an update in six months' time. Thank you for everybody's time. Thank you, Hannah. Thank you. Thank you. Cheers. Bye-bye. Bye-bye. Goodbye.